AP Macro Test Flashcards
Why do we only include ‘final’ goods and services?
To prevent double counting
What is GDP and how is it calculated?
The total value of all final goods and services produced in a year within a country
Are financial transactions included in GDP?
No.
Why is GDP an imperfect measure of societal well-being?
It ignores income distribution and doesn’t factor out spending on disaster relief and epidemic costs
What is national income?
The sum of income earned by the factors of production owned by the citizens. Includes wages from labor, rent for land, and interest for money
Expenditure approach for calculating GDP
GDP = C + I + G + (X - M)
Personal income
Income received by households before personal taxes
Perform the income approach for calculating GDP.
National Income + Depreciation - Subsidy Payments + Net Income of Foreigners
Why is depreciation added to national income?
Depreciation expenses are subtracted from corporate profits before NI calculation, so they need to be re-added to reflect the value of the output needed to replace or repair worn out capital.
How is “net income of foreigners” calculated?
Income of foreigners working here - Income of native citizens working abroad
Why must we add the net income of foreign workers to NI?
NI includes the income of all citizens everywhere. Therefore, to calculate GDP, which includes the value of all goods produced domestically, we need to subtract the production of goods by domestic people that is made abroad.
GDP includes the value of goods produced _______ by _______
domestically, anyone
Money Illusion
When nominal salary goes up (but not real salary), which tricks consumers into excessive spending
How are menu costs a consequence of inflation?
Higher prices force businesses to print/publish new prices
Those who borrowed money at fixed rates pay back amounts that are worth _______ in real terms due to inflation
less
How is CPI calculated?
(cost of base year market basket at current prices / Cost of base year market basket at base year prices) x 100
Calculate inflation between years
[(CPI in year z/CPI in year Y)-1] * 100
The PPI is useful for ______
predicting future inflation, since companies pass costs onto the consumers
GDP Product Deflater is the same as the PPI, except it uses the __________
current year market basket
Frictional unemployment
People who are between jobs
Structural unemployment
A mismatch of skills, or people that are unemployed by the structure of laws and policies
Labor force participationo rate
Number of people in the labor force divided by the working age population
Cyclical unemployment
Results from downturns in the business cycle
Seasonal unemployment
Results from the time of year